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Gold has traditionally been the ultimate funk investment, the asset you buy when you’re really scared.
Was Friday’s record high of $2,325 an ounce a sign that investors expect more economic trouble?
Or just a knee-jerk reaction to rising political tensions in the Middle East? Or was it perhaps driven by the rise in US stock prices, with the S&P 500 close to all-time highs, with no warning at all?
It’s complicated. Gold has certainly been a hedge against inflation, and a safe store of value in volatile parts of the world. That is why the major central banks hold a large part of their reserves in metal.
The US has the largest stockpile of all, more than 8,133 tonnes according to the World Gold Council’s count late last year. Next comes Germany with 3,353 tons, followed by Italy with 2,452 tons, France 2,437 tons, Russia 2,333 tons and China with 2,235 tons.
Record high: Gold has traditionally been the ultimate funk investment, the asset you buy when you’re really scared
Britain, thanks in part to Gordon Brown’s 1999 decision to sell half our stocks, has only 310 tonnes. Considering that the average gold price in 2000 was only $280 per ounce, this is not very rosy.
But while gold has provided some protection against inflation, it has two major shortcomings as an investment.
One of them is that it does not generate any income. The other is that the price has been very volatile at least since the 1933 to 1970 peg of nearly $35 an ounce was removed.
In 1980, the price skyrocketed to over $600 per ounce before falling back below $300 in the early 2000s. It then reached $1,825 in 2011, before retreating to $1,065 in 2015, before climbing back to the current all-time high.
While there’s a good argument that anyone with a little extra money should own some gold, the traditional limit would be no more than 10 percent of their wealth.
What this volatility does tell us, however, is that movements in the price of gold are a good indicator of fear, not just about inflation, but also about society’s ability to hold together.
If you think back to the 1970s, when the consumer price index was above 25 percent, there was real concern on both sides of the Atlantic that we were facing hyperinflation. Many people could still remember what happened in the 1920s and the 1930s as a result. So the gold price went up.
When Paul Volcker, Chairman of the US Federal Reserve, raised the Fed Funds rate to 20 percent in June 1981, it became clear that the US would unite and a new stability would emerge. So fleeing to gold was no longer necessary. A similar sense of crisis emerged after the 2008 banking crisis. It looked like Europe would lose the euro, until Mario Draghi, president of the European Central Bank, famously said in 2012 that the ECB would “do whatever it takes” is’. to save the currency.
Gold fell again. Since then we have had another scare, with inflation at its highest level since the 1970s and 1980s, an experience unlike most working people in the developed world. And not just the general workforce. Most professional investors also have no experience. The average age of a fund manager is around 45 years. When they started their work 20 years ago, inflation seemed truly defeated – and that was wrong.
So see, the explanation for gold’s recent surge has three parts, tied together by fear.
People are worried that the current bull market has gone a bit too far and that it might be wise to diversify a bit.
Second, they fear that there could be a second wave of inflation, just like in the 1980s.
And third, it is not yet clear how well Western societies will hold together in the face of significant social and economic upheaval.
I have confidence in this last point, but the gold market says many do not.